CASE

THE MULE

Billy Goat Inc., a public company, is a manufacturer of lawn and garden and recreation machinery.The company manufactures both large and heavy-duty commercial equipment and smaller equipment for residential use.The Company has a large product line that includes tractors, lawn mowers, snow blowers, snowmobiles, all-terrain vehicles, hedgers, tillers, etc.The primary purchasers of their commercial products are golf courses and ski resorts.

The Company sells 90-95% of their products through authorized dealers.The majority of the dealers sell Billy Goat Inc.'s products exclusively and the Company feels that the dealer network gives them a competitive advantage.The dealers are independently owned.Billy Goad Inc. recognizes revenue when deliveries are made to the dealer.Thje dealers pay for the products under normal business terms.There are various marketing efforts that are performed in conjunction with the dealers.The majority of these marketing efforts are through sales incentives or rebates.Billy Goat Inc. reimburses their dealers fro all rebates and sales incentives.Billy Goat Inc. currently only record an estimated rebate liability for product that has already been sold to their dealer network.This policy has been disclosed in t e financial statements and the SEC has approved this treatment.

One of the Company's most successful products over the past several years has been the XT-12, or "the Mule."The Mule is a tractor/lawn mower that can be equipped with a mulcher, snow blower, tiller and various other accessories.The Mule was sold from 1986 to 1995 and was considered the industry leader.Over the years, there ahv been several accidents involving the Mule.The accidents have recently caught the attention of the media and there have been several stories reporting a potential design flaw.The Company claims that the equipment is as safe or safer than the competitors, and they feel that they have the industry statistics to support their claim.However, a large class action lawsuit has recently been filed against Billy Goat Inc.The lawsuit claims that there is a design flaw that makes the Mule's mower unsafe to operate and that Billy Goat Inc. needs to either recall all Mules and fix the flaw or provide compensation to the plaintiffs.

Billy Goad Inc. is very confident that they will win their case; however they do not like the negative publicity associated with the lawsuit and are afraid that the case could seriously affect their customer loyalty. Therefore, Billy Goat Inc. has proposed a type of settlement or good will gesture that will allow Billy Goat Inc. to maintain customer loyalty without having the cash outlay of total recall.

Billy Goat Inc is aware of a recent business trend in which companies have been settling lawsuits with coupons or certificates good for discounts on future purchases. This strategy is attractive because the company could continue to assert that there are not past or present safety problems associated with the product.Therefore, this would simply be a strategy to maintain customer loyalty in light of their recent bad press.

Under the proposed settlement, any current owner of a Mule will receive a certificate for $100 off the purchase of any Billy Goat Inc. product within the next three years.The certificate is similar to the current rebates and sales incentives offered by Billy Goat Inc.Billy Goat Inc. would also agree to pay the legal costs for all parties associated with the settlement.The legal costs are expected to be significant.

Management also believes that the Company's competitors would honor these certificates at their dealerships.The Company believes that the competition will match any of their rebates or sales incentive programs.

Billy Goat Inc. would like to account for the certificates as a sales incentive or rebate and record as a reduction of gross profit as the tractors are sold and the certificates are redeemed.Their justification for this accounting is that they have not admitted fault; the program is similar to all of their other sales incentives and they expect the competition to match the program. Billy Goat Inc. has been expensing their legal costs as they are incurred and ahs accrued the costs of the plaintiff's legal expenses as they are reasonably estimable and with the proposed settlement it is probably that Billy Goat Inc. will have to bear these costs.

Required

Is it appropriate to account for the certificates as a sales incentive and match the expense associate with the certificates with the future revenue stream?